Systematic risks are associated with every financial transaction, whether it is debt based credits or equity based finances. The practice of covering such risks through Credit Default Swaps (CDS) derivatives failed to mitigate risks at a time when the market collapsed due to large scale default swaps; rather it intensified the financial crisis. After the […]

At a time when economic recovery needs more stimuli by the Government of India (GoI), there is also an urgent need to safeguard the economy from the debt trap because the GDP growth rate fell to 6.7% in 2008-09 from 9% in 2007-08; the debt servicing reached 58.83% of the total expenditure for the year 2008-09. It means maximum receipts are now spent for debt servicing which accounted for 15.87% of the Gross Domestic Product (GDP), while the debt receipts were 9.78% of the GDP in 2008-09. Even the interest payments were 21.39% of the total expenditures by GoI and 5.77% of the GDP in 2008-09. Notably the revenue deficit in 2008-09 is already 30% due to high debt serving ratio to total revenue expenditure.

In an attempt to find the actual reasons behind the high fiscal deficit, it is observed that the increased debt receipts by GoI to finance revenue expenditures (especially high debt servicing); increased subsidies on food, fuel and fertilizer; and rural development through schemes like NREGS, farmer’s loan waiving scheme and Sarva Shiksha Abhiyan are the three most important factors of high fiscal deficit. Since there is a need for more stimuli to counter recession in the economy, it is expected that the plan expenditures may further increase whereas due to recession, the revenue receipts may decline. This decrease in revenue receipts and increase in plan expenditure may increase the fiscal deficit to an unwanted high level. Working upon different options to reduce the fiscal deficit, it is found that Islamic finance can reduce the fiscal deficit even if revenue receipts decline and plan expenditures increase.

Islamic financial products have a great role to play in reducing the fiscal deficit in emerging economies by replacing the debt based investments for infrastructure with funds mobilized through equity based Government Securities for infrastructure projects. Let’s see how Islamic finance may help us reduce our present fiscal deficit.

Notably the total revenue expenditure is 142.92% of total revenue receipts reflecting 30.03% revenue deficits. The major cause of this high revenue deficit is high debt service ratio to total revenue expenditures. For a developing economy like India, in the proposed plan we project increasing capital expenditures, but in the revised estimates of 2008-09 budget, the revenue expenditure is 89% and the capital expenditure is just 11% of total expenditure; all due to high debt servicing ratio (66%) to total revenue expenditure. Notably the interest payment alone is 24% of total revenue expenditures. So, with capital expenditure being as low as just 11% of total expenditure and debt serving being as high as 59% of total expenditure, how can we go about planning to foster inclusive growth?

Debt Finances crossed the Planned Estimates:

The debt based finances for investments under 11th five year plan document was proposed to be 48.42% of total receipts for 2008-09, whereas the revised budget estimates reveal that the debt receipts were 96.38% of total capital receipts in 2008-09. This reflects our inability to mobilize targeted amount of non debt receipts, causing high fiscal deficit due to interest payments over borrowed debt receipts.

According to 11th plan documents, projected investments in 2008-09 should be of Rs. 321,579 crores while total plan capital expenditure in the revised budget observed just Rs. 41,301 crores. So the plan capital expenditure is just 12.84% of targeted investment in 2008-09. This shows our inefficiency to make budget development pro inclusive growth and to foster growth. So, it is better that GoI reduce debt borrowings which ultimately increases revenue deficits; and shift the focus on infrastructure investments to stimulate the economy at a time when GDP growth rates and employment growth rates are falling.

Actual Debt Receipts are 210% of the planned Estimates:

Since the revised estimates on debt receipts (Rs. 326,515 Crores) is already 210% of estimated requirements of debts (Rs. 1,55,704 Crores) by year 2008-09 as projected in 11th five year plan documents, the GoI should seriously think about this increased debt receipts. The funds utilized for debt servicing (Rs. 530,010 Crores) are already 162% of debt receipts to finance fiscal deficit (Rs. 3.26.515 Crores), the GoI should revisit its budgeting. How good is it to increase the debt receipts at a time when Indian industries are looking for more affordable credits from banks to meet the challenges after the global meltdown?

In year 2008-09 the deficit budget cost an amount of Rs. 192,694 crores to GoI which was paid as interest over the debt receipts borrowed to finance the deficit budget. This may be called as loss to GoI because had there been equity based receipts against debt receipts, GoI would have saved this amount.

In the 11th document for a five-year plan, it was projected that in order to meet the proposed investment needs by year 2008-09, around 50% debt receipts worth Rs. 63,207 crores would be mobilized as domestic banks’ credit. However, the figures of revised budget estimates for 2008-09 states that market loans (amounting Rs. 261,972 Crores) […]

Despite all due respects to ministers and other managers of economic policies of our great country, It is disappointing to read statements where it is repeatedly held that the next year will be economically tougher, that GDP growth rate may further decline, that fiscal deficit may increase over the revised budget estimates and that Indian […]

Hardly any political party says that the financial sector regulations have been more beneficial to the formal sector compared to informal sector especially in terms of access to equity finance. Political parties do make agenda over religious, social and civil matters, but they rarely speak on economic injustice of poor and vulnerable workers (known as Aam Aadmi) making their livelihood from unorganized sector enterprises. There is a great deal of injustice to the unorganized sector in financial terms due to regulatory imbalances which reflects some impurities in democratic structure of Indian economy. Similarly it is rather unfortunate that political parties do not tire taking positions on issues like national security, but there is hardly any coordination to resolve economic problems which are some times as pressing, if not more, as the issues of national security. Take for example, the issue of recession, which is assuming alarming proportions with each passing day.

Though Reserve Bank of India (RBI), through monetary instruments succeeded in protecting Indian commercial banks from global financial crisis, the Securities and Exchange Board of India (SEBI) did not succeed as much to protect the stock markets. From January to September 2008, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) jointly lost Rs. 56,47,685 crores in terms of market capitalization which amounted to more than Gross Domestic Product or Aggregate Liquidity Stock of India. The regulators of stock market presumably did not pay enough attention to this loss, probably because it is not a debt based entity and they saw no need to bail it out. Butdoes this loss have anything to do with economic growth of India? Or has Indian regulators ever thought about converting this amount into real capital formation instead of paper assets?

The international financial crisis began over a year ago, and has intensified over past few months. The International Monetary Fund has already warned that this credit crisis will result in losses of over trillion dollars and that it may worsen especially after the 150-year-old US financial giant Lehman Brothers been declared bankruptcy, not to mention […]

The fall of giants in the world financial sector like Lehman Brothers in the aftermath of the US sub-prime mortgage crisis, we need to be strict about credit rating system to restrain chances of any further bankruptcy. Interestingly, since Islamic banking adheres to strict credit rating system and disallows indebted economic agents to avail […]

Economic exigencies and political expediency in a country with more Muslim population than Pakistan, at least after six decades of independence, should consider introduction of Islamic Banking as part of reforms in the Banking Sector. Since this intervention requires some important changes in the regulatory regime in line with those obtaining in more Muslim liberal […]